Financial Fraud Is Growing, Post Madoff

Financial fraud is on the rise. You’d think with the increased awareness due to publicity around Bernie Madoff’s $65 billion dollar Ponzi scheme that incidents of financial fraud would have gone down, but instead it has been quite the opposite. According to the Federal Trade Commission’s (FTC) Consumer Sentinel Network Data Book, there has been a 62% increase in financial and other fraud claims in just three years, with over 1.5 million individual claims in 2011. Some of it we have little control over, such as hackers accessing personal account information from financial institutions over the internet. Areas we can control are the more personal ones where we are actually writing checks, although “affinity” scams and Ponzi schemes are more subtle and not as easily recognized. With the passing of the JOBS Act of 2012, “crowd funding” opportunities also open the door for more fraud possibilities.

I am highly aware of financial fraud, not just because I am a financial planner, but because I live in a state participating in a wide scale anti-fraud awareness and education campaign. I live in Utah, a state besieged by financial fraud (approximately $2 billion dollars since 2010), especially “affinity fraud,” which targets closely knit religious groups. Utah only has a population of about 3 million people, so the fraud bill is around $700 per person. At this level of fraud, the state of Utah loses about 1% of its Gross State Product each year—dollars that are sorely needed in today’s economy.

The victim’s lives are changed forever, but fraud also affects everyone. A fraud victim may have to delay retirement if their nest egg disappears. This means not one but two jobs are affected—the co-worker who might have gotten a promotion, and the young new hire who would have taken their place. The effects of financial fraud can contribute to high unemployment as workers hang on to their jobs since they can’t retire. It also may contribute to the $1 trillion in student debt as children of fraud victims take on additional student loans when college funds are wiped out. The housing market is affected when a home is foreclosed on and the bank takes a loss, which can cause neighborhood real estate values to decline. Even the community takes a loss when less property tax is paid, which means fewer funds available for public schools. There is also the unseen cost when fewer cars are purchased, fewer new homes are built, and fewer remodeling projects take place. Whether it is direct or indirect, fraud’s effects are deep.

Here are three areas where financial fraud can occur, and how to protect against it:

Insure yourself against identity theft. Identity theft may be a passive type of fraud where you aren’t actually writing a check to a scam artist, but you are vulnerable nonetheless. Security can’t keep up with the proliferation of identity theft as hackers are constantly finding new ways to access your personal information. In fact, McAfee Blogger Carlos Castillo writes about Trojan computer viruses ironically called “bankers” that steal your bank passwords. Smart phone information is the next challenge for hackers.

Internet banking and mobile banking apps aren’t bad. In fact, easy access to your information can be helpful in managing your cash flow. You just don’t want anyone else getting your information. With malicious hackers out there, it’s tough to protect yourself. The best course of action is to use some basic common sense practices of protecting your personal information, and to only use secure sites. Beyond those protective steps, you can insure against loss in two additional ways. Start by choosing financial institutions that back you up with strong guarantees. For example, Bank of America offers a zero liability guarantee for their consumer debit and credit cards. Check with your bank to find out what your liability would be for fraudulent transactions. Ask them if there is a time frame in which you need to report fraudulent transactions, and be sure to monitor your accounts accordingly. For example, US Bank will cover any unauthorized transactions as long as you report them within 60 days of the first statement date when the unauthorized transactions appeared.

Secondly, subscribe to a credit monitoring service through one of the major credit bureaus. As a former victim of identity theft, I try to be extra cautious and use Experian’s service that has daily monitoring, alerts, and a $50,000 guarantee with access to a fraud resolution specialist. The new reality in the world today is in addition to life, disability, home and auto insurance, we may also need anti-fraud insurance.

If you are a victim of identity theft take action immediately. Report it to the police and place a fraud alert on your accounts with the credit bureaus. With this action, a requirement to notify you if new credit is being requested in your name is added to your credit file (at no cost to you). Close your bank accounts and transfer funds to new ones. The sooner you take action, the better you can protect yourself. The Federal Trade Commission has guidelines on actions to take – click here.

Watch out for the same scam but with a different disguise. In almost all cases of fraud, there is no actual investment made. The classic Ponzi scheme consists of paying off early investors with money taken in from late investors—a scam that dates as far back as 1899. There may be other types of scams out there that have yet to be detected. Ironically, this is actually one of the easiest things to catch. The problem is usually the scammers seem beyond reproach. Maybe they are part of a church or synagogue, or they are a well respected leader in the community, so the victims don’t do thorough due diligence on the investment.

The bottom line is with any investment, there should always be an independent statement coming from a third party. If you are only getting an investment statement from the broker, and not the investment company, that should raise a red flag. You should always receive a separate statement from the investment company where the funds are held with a general phone number to the home office. Some other red flags include consistently high investment returns, unregistered securities, unlicensed sellers, and overly complex transactions.

Prevention is the best defense for this type of financial fraud since recovery of assets could be minimal at best.

Watch out - “Crowd funding” could attract the next wave of financial scammers. Crowd funding has been around in the U.S. for years as a way for charities to raise capital, and President Obama was a master at generating campaign contributions through a similar system using Twitter and Facebook during his presidential election campaign in 2008. Used correctly, crowd funding can be a boon for startups that are looking to raise money, which in turn will hopefully help create jobs in the U.S. “Used correctly” is the operative term because the system is fraught with potential fraud against unsuspecting investors. For this reason, the recently signed JOBS Act has incorporated investment restrictions that are intended to protect investors, such as capping investments at $2,000 for investors with an income or net worth of less than $100,000.

Relaxed restrictions may be good for entrepreneurs, but not necessarily for investors. Investors should take extra care when considering the investment risks of a new venture. Issuers may be inexperienced, have little to no performance history, or simply make up performance numbers in an attempt to get you to invest in their company. This can make it very difficult to do any kind of due diligence. Ultimately, you need to be aware of issuers that may be simply trying to steal your money.

I’ve personally been in the financial business for a quarter of a century, and most of the financial professionals I know are honest and have high integrity. The problem is there are a small number of people in the financial services industry who aren’t trustworthy, and for many people it’s difficult to see the difference between a trusted professional and a problem waiting to happen. That discernment, however, is a skill that is worth taking the time to learn. We don’t have a choice but to always be on high alert.

Nancy L. Anderson, CFP ® is Think Tank Director and Resident Financial Planner at Financial Finesse, the leading provider of unbiased financial education for employers nationwide, delivered by on-staff Certified Financial Planner™ professionals. For additional financial tips and insights, follow Financial Finesse on Twitter and become a fan on Facebook.

I write about living well while transitioning to retirement, working in retirement and personal finance. We can have it all – a rewarding career and fulfilling personal life while planning for retirement.